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Sunday, February 17, 2008

Economists around the world are belatedly admitting out loud that much of what they have been telling governments, businesses,investors and students has been increasingly mistaken and misleading.

For some, this is old news, especially for economists themselves,who have long made fun of their errors. Their forecasts are so bad that Robert Reich, an economist and secretary of labor during the Clinton presidency, has suggested that "economic forecasters exist to make astrologers look good."

What is new is their increasing willingness to admit that the toolsthey have been using for a century or more – theories and assumptions originally designed for probing smokestack economies – are becoming more and more irrelevant or useless for analyzing today's knowledge-hungry, no-longer-industrial economies.

With the U.S. in the lead, Asian countries racing to catch up andEurope struggling to keep pace, advanced economies are shifting fromthe reliance on Second Wave assembly lines and muscle power to ThirdWave brain power. This transition is typically symbolized by computers,the Internet, mobile phones, digital production lines, networks,ad-hocratic organization, heavy investment in research and developmentand other knowledge-intensive tools and methods.

Put all these changes together with corresponding changes ininstitutional boundaries, and the roles of managers, employees,consumers and prosumers, and it is evident that we are inventingsomething new on the face of the earth – a revolutionary wealth system.

Economists first caught sight of this as far back as 1962 whenFritz Machlup of Princeton published a prescient book called "TheProduction and Distribution of Knowledge in the United States." Itshowed that even then the U.S. economy was becoming more and moredependent on knowledge.

In the 1960s, the polymathic Kenneth Boulding and a small number ofother economists began showing an interest in the economics ofknowledge. But within their profession these leading minds wereintellectual outriders whose ideas were usually pooh-poohed or ignored.As a result, even as many economies grew more and more dependent onknowledge, conventional economists continued to rely on industrial-agemeasures, models and notions.

In the 1970s and 1980s, we, along with other futurists andeconomists, repeatedly called attention to the growing gap between theemerging revolutionary economy and the obsolescence of mainstreameconomics. Yet little was done to correct the problem.

In consequence, as knowledge – admittedly hard to measure – grewmore and more important, the picture of reality presented tobusinesses, governments and key international organizations – right ondown to the World Trade Organization and the U.N. – grew more and moredetached from reality, reaching a point at which the discrepancy couldno longer be ignored.

The gap is now so wide that Business Week recently devoted alengthy cover story to it, detailing many of the distortions andmischaracterizations of trade, unemployment and fiscal and monetarypolicy that result from continued reliance on wildly out-of-datetheories and data. Nor is the problem just an American phenomenon.Similarly poor numbers and models are used by economists in most of therest of the world, too.

A key reason why economics has not kept up with the changingeconomy is the sheer difficulty of properly defining and measuringknowledge and knowledge work. Who, for example, is a "knowledgeworker"?

Many estimates about the workforce, present and future, forexample, focus on the most easily quantified employee categories. Theresult is a very narrow notion of who is, and who is not, engaged inknowledge work.

A widely propagated categorization scheme suggests that to be aknowledge worker one needs to be a scientist or an engineer, amathematician, an information technology specialist, a teacher or amember of one of the professions. The assumption is that if we tallythese up, we have identified the "knowledge labor force." From that, itis presumed, we can calculate their contribution to gross domesticproduct and many other variables.

But this is crude at best and misleading at worst, radicallyunderestimating the extent of knowledge work in the real economy andthe number of workers doing knowledge work, as we'll see next.

Part 2:

Many economists are belatedly struggling to catch up with the increasing importance of knowledge in advanced economies.

Even among the most sophisticated, the true role of knowledge inthe creation of wealth is still, for the most part, underestimated. Andeconomists still don't grasp the often-hidden aspects of knowledgework.

Economists will have to subdivide knowledge into subtypes. Not allknowledge is the same or has the same potential for creating wealth.And building a knowledge economy doesn't require that every worker,today or tomorrow, will need the cognitive or analytic skills of theproverbial "rocket scientist."

Thus, economists must recognize that even many jobs categorized aslow skill – and therefore not counted in the "knowledge work" category– have, in fact, a knowledge component. By ignoring that component, theamount of knowledge work in the economy is radically underestimated.

Car mechanics may still install a new tire or a windshield wiper.But, according to the U.S. Department of Labor, their work has changed"from mechanical repair to a high technology job. As a result, theseworkers are now usually called 'technicians.' . . . Technicians musthave an increasingly broad base of knowledge about how vehicles'complex components work and interact, as well as the ability to workwith electronic diagnostic equipment and computer-based referencematerials." What percentage of these jobs consists of knowledge work?

What about farmers? Even the poorest peasants in history havealways needed knowledge about seeds, soil and weather. Today, in theU.S., various agriculture organizations representing corn, cotton andsoybean growers have teamed up with the National Aeronautics and SpaceAdministration to teach "precision farming" made possible by data fromsatellites and high-flying aircraft.

According to NASA, the farmers learn "where fertilizers are needed– and where they're not needed. They discover pests – and spray onlyinfested areas. It's a remarkably 'green' approach to farming."Precision farmers use GPS receivers, farm equipment with computerizedcontrollers and other digital equipment. As one farm-equipment dealerputs it, today "it would help to have a college education just tofigure out the benefits in running the tractors."

Are farmers knowledge workers? Full-time or part-time?

Many other classes of employees also do part-time knowledge work.Waiters punch orders into a computer, which not only sends instructionsto the kitchen, but provides data useful for purchasing, scheduling andmany other purposes. It has even been suggested that golf caddies are"a simplified example of a knowledge worker" because "good caddies domore than carry clubs. . . . A good caddie will give advice to golfers,such as, 'The wind makes the ninth hole play 15 yards longer."'

If the definition of knowledge work is realistically broadened toencompass part-time knowledge work, the role of knowledge in theoverall economy becomes far more important than current statisticssuggest.

The extent of knowledge work in advanced economies would be stillfurther enlarged if economists recognize that there are manyeconomically essential forms of knowledge. These include tacitknowledge, personal insight, the ability to care for the ill or elderlywith warmth and gut intelligence, a talent for leadership, persuasiveexpression, adaptability, a gift for timing and many other skills thatare primarily social, cultural and psychological. These skills wereseldom required for repetitive tasks on yesterday's assembly line butare extremely valuable, especially in tomorrow's service sector.

Not all of these carry the same weight or have the same effect on acompany's bottom line or on the national economy, and they are evenharder to define and quantify.

Yet another way of categorizing knowledge work is according towhether it is being generated, stored, exchanged or transformed. Or bythe different degrees of abstraction required by different jobs – fromdata entry all the way up the abstraction ladder to research scientist,financial "quant" or corporate strategist.

Knowledge workers in the same firm also perform differentfunctions. Some are good "knowledge importers" – they bring knowledgefrom outside the firm, from customers, critics, competitors and others.They are good gatherers. Others are "knowledge exporters" – they bringdata, information and knowledge to the outside world from inside theorganization. They might be publicists or salespeople, for example.Others are "knowledge relayers" – they pass data, information and/orknowledge back and forth within the firm. Still others can be regardedas "knowledge creators."

Our knowledge about knowledge is so poor that we all – not justeconomists – are unprepared for what lies ahead. One forecast that isreasonably safe is that economists, trying to answer questions likethese, will devote more and more attention to the work being done in anew branch of their own profession – neuroeconomics, the study of howthe brain itself works when making economic decisions.

With or without help from that quarter, however, until economistsunderstand all these dimensions of knowledge work, they will continueto drastically underestimate not only the contribution of knowledgework to the money economy, but the role it plays in the trulyrevolutionary wealth system emerging on the planet.